Risk Update

Risk News — New New Jersey Outside Counsel Guidelines Curtails Conflicts Waivers & Positional Conflicts, “ENGAGE” AML Response, Law Firm CEO Conflicted Out

The acting Attorney General of New Jersey has released updated Outside Counsel Guidelines which go into effect this November. More at this page: “New Jersey Office of the Attorney General” with a PDF of the complete guidelines themselves here.

  • “Law firms retained by the Division of Law are required to comply with the Division’s Outside Counsel Guidelines, which were last updated in January 2015. Over the past several months, the Guidelines have undergone a thorough revision and are posted here for a reference. The new Guidelines go into effect on November 1, 2022. The Guidelines include detailed information about conflicts of interest, staffing, billing, confidentiality, and engagement of third-party vendors, among other topics.”
  • “One common question is whether a private law firm can perform work for a particular state agency when that firm also represents clients adverse to a different state agency. The issue has been discussed in a number of ethics opinions and court rulings, which were most recently summarized in a May 2019 Attorney General letter.”

From the guidelines:

  • “State agencies cannot waive any conflicts that the Rules of Professional Conduct (“RPCs”) prohibit, and counsel should neither request nor expect the Attorney General to grant such a waiver. See RPC 1.7(b)(1 ), 1.8(1) and 1.9(d)”
  • “State agencies cannot waive any conflicts that the rules of professional conduct prohibit, and counsel should neither request nor expect the attorney general to grant such a waiver.”
  • “Counsel must avoid a conflict of interest involving the State client they represent. As part of the retention process, the Division of Law will identify those entities the Division deems to be the ‘client’ for conflicts of interest purposes.”
  • “The Division prohibits counsel that represent a State client from:
    • a) Representing private parties before the State client (or its officers) in an adversarial, transactional or non-adversarial proceeding…
    • b) Representing private parties in any matter in which the State client is also a party, if the private party has interests adverse to the State client.
    • c) Representing the State client in a matter in which a private client is adverse to the State if the firm represents the private client in other matters, even if the firm does not represent the private client in the matter involving the State client.
    • d) Representing the State agency in a matter in which a private client appears before the agency, submits an application to the agency or otherwise is requesting the agency take some action or refrain from taking some action, if the firm represents the private client in other matters, even if the firm does not represent the private client in the matter before the agency.
    • e) Representing a private party who has interests adverse to the State client.
    • f) Representing another client where the outside counsel’s knowledge of the State’s legal positions or strategy, derived from the representation or prospective representation of the State client, could be used to the advantage of the other client or to the disadvantage of the State client.”
  • “A conflict may also arise from counsel’s advocacy of positions conflicting with important State interests. Positional conflicts could arise in litigation matters, transactional matters, and lobbying efforts. Prior to your engagement, your firm should carefully review whether any such conflict exists or if there is a potential for such a conflict. Whether a positional conflict exists is a fact-sensitive determination.”
  • “Outside counsel, however, should generally avoid advocating a position that would limit the authority of the State client, would expand the scope of potential liability of the State client, or would require the State client to divulge information that the State client generally regards as confidential or privileged.”
  • “Outside counsel must promptly report positional conflicts to the designated attorney before the firm accepts an engagement that will require the firm to advocate a position that may be adverse to a State legal interest or otherwise prejudicial to the interests of the State.”

And for those tracking Congressional activity on AML rules, Nigel Riley at Intapp advises: “ENABLERS Act: Enhance your risk and compliance management” —

  • “For years, experts have warned professional service firms in the U.S. that they need to start preparing for money laundering regulations. And in recent months, those warnings have become impossible to ignore.”
  • “The latest and loudest alert came in July 2022, when the U.S. House of Representatives proposed the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act. This bipartisan legislation, aimed at so-called gatekeepers, would expand anti-money laundering (AML) surveillance — currently required of financial institutions — to professional services firms, requiring accounting and law firms to collect, monitor, and report specific types of client information.”
  • “Passage of the ENABLERS Act is not guaranteed. It’s currently an amendment to the National Defense Authorization Act (NDAA), which observers expect congress to vote on by December. It could undergo significant changes prior to the final vote, or not pass at all this year.”
  • “My advice to firm leaders is simple:
    • Don’t delay. Proactively prepare by enhancing your KYC and AML processes.
    • Focus on the long-term. Augmenting your firm’s risk and compliance programs can have ongoing, positive impacts on other aspects of your business.”
  • “Firms will have to find their own path, but they can get there by focusing on three key areas:
    • Process — Now is the time to thoroughly review current policies and practices, including overall governance framework and risk and compliance protocols for assessing risks associated with accepting new clients and engagements, clearing conflicts, onboarding new business, monitoring engagement performance, and managing client relationships. You can also map out a plan for review and conduct a gap analysis against the newly proposed requirements.
    • People — The risk and compliance team shouldn’t be the only function to prepare for the new regulatory requirements. Instead, a cross-functional evaluation of the client lifecycle and all touchpoints provides a better approach to comprehensively assessing your firm’s current risks, capabilities, and staffing needs. Enhancing team resources, upskilling staff, and identifying inefficiencies can create additional capacity to satisfy the new requirements and allow staff to allocate more time to higher-value work and analysis.
    • Technology — It’s critical to determine if your firm’s current software is optimal enough to support more robust tracking, greater amounts of data, and enhanced reporting as required by the proposed legislation. Take this opportunity to reconsider the software tools currently in use at your firm, evaluate paper-based or manual processes, and identify areas prone to human error where automation and systems integration could mitigate risks and make adopting new regulations easier.”
  • “As my colleague and risk management expert Meg Block notes, preparing for the requirements of the ENABLERS Act will require firms to review client onboarding procedures and create additional mechanisms for ongoing monitoring throughout the client lifecycle. This process could create long-term benefits.”
  • “Whether or not the ENABLERS Act passes this year, the message is clear: Professional services firms need to prepare for AML regulatory requirements. By starting now, firms can better understand how the regulations may affect them and where they need to focus.”

Finally, interesting news on a law firm CEO conflict for the Ince Group plc (Stock Ticker: INCE), which describes itself: “As well as providing legal services, The Ince Group provides accounting, financial services, consulting and pensions advice to clients.” “Former Ince chief exec removed as company director over ‘conflict of interest’ concerns” —

  • “The former chief executive of the listed law firm Ince has been removed from his position as a company director with immediate effect, it was announced yesterday.”
  • “In July, Adrian Biles confirmed he would step down from his role as Ince’s chief executive and resign from the board upon completion of £8.6 million fund raising project through the issuance of new shares and a loan.”
  • “In an announcement to the stock market yesterday, Ince said Biles ‘has been removed as a director of the Company with immediate effect, as a result of circumstances which may give rise to a conflict of interest between Adrian Biles and the Company.'”
  • “The consequences of all this can be seen in the company’s latest financial results in which revenues dipped 3% to £97 million. Ince’s share price also dived 50% to around 5p following the July announcement that it would be undergoing further financing. The listed law firm’s shares price tumbled further to 4.33p in the wake of yesterday’s announcement.”